First Guaranty Bancshares, Inc. — Q2 2015 Form 10-Q
Business and period: Louisiana bank holding company operating First Guaranty Bank, with 21 banking facilities. The filing covers the quarter and six months ended June 30, 2015; financial statements are unaudited. Comparisons are with Q2 and the first six months of 2014, and balance-sheet changes are generally versus December 31, 2014.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $11.8 million | $11.0 million | $23.7 million | $21.5 million |
| Provision for loan losses | $0.4 million | $0.4 million | $1.0 million | $0.7 million |
| Noninterest income | $2.1 million | $1.5 million | $3.9 million | $3.1 million |
| Noninterest expense | $7.7 million | $8.1 million | $15.6 million | $15.7 million |
| Net income | $3.9 million | $2.7 million | $7.3 million | $5.5 million |
| EPS | $0.60 | $0.41 | $1.12 | $0.84 |
- Profitability: Q2 net income rose 44.6%; six-month net income rose 33.0%. Net income available to common shareholders was $3.8 million for Q2 and $7.1 million for the first half, after preferred dividends.
- Margins: Net interest margin was 3.16% in Q2, up 3 basis points year over year; first-half margin was 3.18%, up 10 basis points. Management cited loan growth, a shift in earning assets toward loans, and lower funding costs.
- Balance sheet at June 30: Assets were $1.513 billion, down 0.4% from year-end; deposits were $1.347 billion, down $24.5 million (1.8%). Loans net of unearned income were $810.4 million, up 2.5%; net loans after allowance were $800.9 million. Shareholders’ equity was $145.8 million, compared with $139.6 million at year-end.
- Cash flow and liquidity: Cash and cash equivalents fell $27.3 million to $17.3 million during the first half. Operating cash flow was $8.6 million; investing used $20.8 million and financing used $15.1 million. Management attributed the cash reduction primarily to seasonal public-funds deposit fluctuations. It reported $131.4 million of net FHLB borrowing capacity, $70.5 million of correspondent-bank federal funds lines, and $0.7 million available on a $2.5 million revolving credit line.
- Borrowings: Short-term borrowings were $13.8 million, versus $1.8 million at year-end; long-term borrowings were $1.2 million, versus $1.5 million. The short-term increase included $12.0 million of FHLB borrowings.
- Capital: The bank and consolidated company met regulatory well-capitalized thresholds. At June 30, consolidated Tier 1 leverage, Tier 1 risk-based, total risk-based, and common equity Tier 1 ratios were 9.32%, 12.98%, 13.85%, and 9.37%, respectively.
Changes, outlook, risks, and unusual items
- Earnings improvement reflected higher loan interest income, higher noninterest income, and lower interest expense. Loan growth included commercial and industrial, residential, and construction lending; non-farm non-residential real estate loans declined on payoffs.
- Securities gains were $0.6 million in Q2 and $0.9 million in the first half, versus $0.1 million and $0.2 million, respectively, in 2014. Gains included sales of a preferred security that converted to common stock; management said it expected to liquidate the common shares during 2015.
- Credit indicators were mixed: nonaccrual loans declined to $10.7 million from $12.2 million at year-end, while total nonperforming assets rose to $16.6 million from $15.0 million, or 1.10% of assets versus 0.99%. The increase was primarily a $3.0 million multifamily loan past due 90 days but still accruing; management stated it was adequately secured and expected full collection.
- The allowance was $9.5 million, 1.17% of loans and 67.5% of nonperforming loans. Impaired loans declined to $21.7 million from $29.5 million. One $1.7 million restructured residential relationship subsequently defaulted; there were no new TDRs in the first half.
- Public funds were $599.9 million, 44.5% of deposits. Three relationships represented 41% of public-funds deposits, and management noted seasonal fluctuations. Time deposits of $250,000 or more totaled $326.9 million.
- Interest-rate risk is material: the disclosed one-year cumulative gap was negative 29.9% of earning assets. Modeling estimated net interest income would decline 17.93% under an instantaneous +400-basis-point shock and 4.52% under a gradual +400-basis-point change. These are scenario estimates, not forecasts, and depend on assumptions.
- The company reported sufficient liquidity and an adequate allowance in management’s view, but provided no specific earnings or growth guidance. Forward-looking results remain subject to economic, competitive, interest-rate, regulatory, credit, and securities-market risks. Series C preferred stock carries a 1.0% dividend rate currently; the rate increases to 9.0% beginning March 22, 2016 if shares remain outstanding.
- Management reported no material change in risk factors, effective disclosure controls, and no material adverse effect expected from ordinary-course legal proceedings. Louisiana’s 2015 corporate-law change also led to reclassification of treasury shares as authorized but unissued shares.
Investor verification priorities
- Assess whether the $3.0 million past-due accruing multifamily credit performs as expected and track nonperforming assets and TDR defaults.
- Review the quality and sustainability of earnings, including securities gains from the converted security, alongside core net interest income and expense trends.
- Monitor deposit stability and concentration, especially public funds, large certificates of deposit, and seasonal cash movements.
- Check the sensitivity of earnings and securities values to interest-rate changes, including loan floors, deposit repricing, and the reported rate-shock assumptions.
- Confirm regulatory capital and liquidity remain adequate and assess the cost implications if Series C preferred shares remain outstanding after the 2016 dividend-rate step-up.